The Medicare Payment Advisory Commission’s (MedPAC) June 2013 Report to Congress (the “June Report”) includes an exploration of options for reducing payment differences across ambulatory settings. To date, MedPAC has paid considerable attention to policies devoted to equalizing payment rates based on the resources needed to treat patients in the lowest-cost, clinically appropriate setting. For instance, in its March 2012 Report to Congress, MedPAC recommended that equal payment be made for evaluation and management (E&M) services provided in hospital outpatient departments (OPDs) as for those provided in doctors’ offices. In its June Report, MedPAC discussed additional services that may be ripe for payment equalization across settings. MedPAC argued that although a patient should have access to appropriate care, a “prudent purchaser” would not pay more for a service in one setting over another.

In the June Report, MedPAC recognized that, while equalizing payment rates across settings would reduce costs, it would not address the important differences between physicians’ offices and OPDs that result in higher costs for OPDs. MedPAC acknowledged that hospitals incur costs to maintain standby capacity for handling emergencies and to comply with additional regulatory requirements. Also, patient severity may be greater in OPDs, and it may cost more to treat sicker patients. In addition, the Centers for Medicare and Medicaid’s (CMS) outpatient prospective payment system (OPPS) is more likely than its physician fee schedule to combine the cost of a primary service with ancillary services and supplies into a single payment; as a result, the packaging of services must be considered when comparing payment rates between settings.

Changing Outpatient Department Payment Rates

In the June Report, MedPAC focused on ambulatory services frequently performed in freestanding offices or ambulatory surgical centers (ASCs) that receive higher Medicare payments than OPDs do. It identified 66 groups of services that may be appropriate for aligning payment rates between OPDs and such freestanding facilities.

MedPAC further divided the services into two groups: (1) those for which payment rates could be equalized, and (2) those for which the gap in payment rates could be narrowed but for which the OPD rate should remain higher. Those included in Group 1 are services (i) that likely are safe and appropriate to provide in a freestanding office, (ii) for which the physician fee schedule payment rates are adequate to ensure beneficiary access, (iii) that are infrequently provided within an emergency department visit when furnished in an OPD, (iv) that have average patient severity that is no greater in OPDs than in freestanding offices, and (v) that do not include 90-day global surgical codes. According to MedPAC analysis, 24 ambulatory payment classification (APC) groups would fall under this classification, and are primarily included for diagnostic testing, including echocardiograms, bone density tests, neuropsychological tests, and electroencephalographs. Approximately 42 APCs would fall under Group 2, including a wide range of procedures such as wound debridement and small intestine endoscopy, as well as advanced imaging and pathology testing.

Were policymakers to adopt MedPAC’s proposed changes to both groups and procedures, program spending would be reduced by $900 million in year one, and beneficiary cost-sharing savings would range from $140 million to $380 million, depending on how OPPS copayments are determined. On average, hospitals’ overall Medicare revenue would decline by 0.6 percent, and outpatient revenue would fall by 2.7 percent.

MedPAC expressed concern with the impact of such changes in payment structure on hospitals that provide ambulatory physician services to a disproportionate share of low-income patients. In the June Report, MedPAC discusses a potential stop-loss methodology to limit the loss of Medicare revenue for these hospitals.

First, MedPAC acknowledges that policymakers will need to consider what criteria should be used by Medicare in determining which hospitals should be eligible for a stop-loss policy. MedPAC suggested that policymakers could base eligibility on a hospital’s disproportionate share hospital percentage, which is the sum of the percentage of Medicare inpatient days for patients who are eligible for Supplemental Security Income (SSI) and the percentage of total inpatient days for patients on Medicaid, or alternatively link the policy to the proportion of Medicare patients treated in an OPD who receive SSI.

Second, an eligibility threshold for the stop-loss policy would need to be set (e.g., the policy could apply to hospitals whose share of low-income patients is at or above the median for all hospitals, at or above the top quartile, or at or above the top decile).

Third, policymakers would need to determine how much Medicare revenue the stop-loss policy should protect (e.g., should Medicare revenue losses for eligible hospitals be limited to 1 percent, 2 percent, or a higher amount?).

Fourth, MedPAC questions whether the stop-loss policy should be temporary or permanent. A permanent stop-loss policy would require CMS annually to determine which hospitals would be eligible for stop-loss protection and to calculate the amount of money to be returned to each eligible hospital at the end of the year. A temporary policy would increase the total long-term savings for the program and for beneficiaries and would provide time to develop targeted policies to protect access to care as needed. The types of hospitals that would benefit the most from the stop-loss policy would be government-owned hospitals and major teaching hospitals.

Approximately 60 percent of rural hospitals are classified as critical access hospitals, which are exempt from MedPAC’s policy proposal. However, the remaining 40 percent of rural hospitals would be disproportionately impacted by this policy relative to urban hospitals. In light of these projections, MedPAC questioned whether lawmakers should enact specific policies to ensure that rural beneficiaries maintain access to care.

Aligning Payment Rates Only for Cardiac Imaging Services

MedPAC proposed an alternative policy focused on aligning payment rates for echocardiography and cardiac nuclear tests only. Reducing OPD payment rates for these imaging services would reduce program spending and beneficiary cost sharing by $500 million in year one, with reduced cost sharing accounting for about $100 million. On average, overall Hospital Medicare revenue would decline by 0.3 percent, and outpatient revenue would fall by 1.5 percent.

Equalizing Payment Rates Between Outpatient Departments and ASCs

MedPAC highlighted that Medicare currently pays 78 percent more for the same procedure when it is provided in an OPD rather than in an ASC. This payment gap has increased over time, and has influenced some ASC owners to sell their facilities to hospitals. MedPAC identified 12 groups of services that are commonly performed in ASCs for which OPD rates could be reduced to the ASC level. These include nine groups of eye procedures, two groups of nerve injections, and one group of skin repair. These services are often not provided with an ED visit when furnished in an OPD and have average patient severity that is no greater in OPDs than in ASCs. Were OPD and ASC payment rates equalized for these services, Medicare program spending and beneficiary cost sharing would be reduced by a total of $590 million per year — with the beneficiary cost sharing savings estimated to be $40-$220 million alone.

Conclusion

In light of MedPAC’s continued attention to payment differences across settings, hospitals are advised to proceed cautiously when considering converting office practices to provider-based clinics. While the June Report does include a recommendation of a payment change to Congress, MedPAC’s discussion of the proposals described above places continued pressure on policymakers to reduce Medicare spending through the equalization and narrowing of gaps in payment rates across settings.